Author Topic: Distressed Sovereign Debt Investing  (Read 3455 times)

Cigarbutt

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Re: Distressed Sovereign Debt Investing
« Reply #10 on: July 30, 2017, 11:37:16 PM »
Sad turn of events.
Institutions matter.
Sometimes political/social climate deterioration is sudden but often the downturn is preceded by an autocratic drift.
I am re-reading Animal Farm by Orwell.
We take a lot for granted but things can get messy very rapidly once the drift is underway.



MrB

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Re: Distressed Sovereign Debt Investing
« Reply #11 on: July 31, 2017, 09:38:38 AM »
In my limited experience, this is what I call a "can't pay, won't pay" situation, so you're left with the discounted future cash flows as the intrinsic value of the bonds (surprised?). Certainly there will be new bonds, which will be issued in a scenario where the debt load has been reduced and the new debt load will be as large as the market will bear (the creditors will see to that). In effect the equilibrium is the largest SUSTAINABLE debt load and sustainability is determined by the tax base (your cash flows).   

SO,
Firstly what you have to figure out is what is normalized GDP (e.g. -25% for Greece recently).
Secondly, you have to figure out what a normalized tax base for the country is.
Thirdly from the tax base you can figure out how much you can allocate to debt service, which are your interest payments (more or less)
Fourthly capitalize your interest payments at a normalized interest rate for the country (it will be a low rate, because the debt has been reduced)
Lastly, divide your "new" debt/"old" debt and you should get a sense of the cents of the dollar your existing debt is worth. (e.g. for Greece we estimated it to be around 35 cents, margin of safety started below 30 and you could buy down to 17)

World Bank & IMF have useful data

It's a journey!!



« Last Edit: July 31, 2017, 09:41:02 AM by MrB »

chesko182

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Re: Distressed Sovereign Debt Investing
« Reply #12 on: July 31, 2017, 06:49:35 PM »
The news from yesterday increases the tensions in the country as it is now "officially" a dictatorship. Votes according to the government were more than 8 million and estimates of the actual votes range between 2-3 million (talk about inflating a number...) Protests and violence are likely to escalate.

~$4 billion of interest+principal payments are due this year, and they have less than 10 billion in reserves, a lot of which is in gold which is already collaterized for other loans. Hard to see China lending more money, but there is speculation that Russia might step in (they were the only country that called the elections legitimate).

My base case is for a default in the next 6 months at which case I will be looking at the bonds to potentially buy them at 15 cents of less (lowest dollar price now trading around 33c). Assuming some form of IMF bailout to the tune of $40 billion and running some realistic debt-GDP numbers with a haircut to the bonds recovery values can range from 20-50c in the form of a restructured bond exchange. The key here is also that a default would be a catalyst for a regime change given it would debilitate their powers and cut a lot of their financing options. Further US sanctions in the form of oil imports etc. would certainly accelerate this, but we'll have to see what Trump has in mind. President Maduro was just added to the OFAC list today.

adventurer

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Re: Distressed Sovereign Debt Investing
« Reply #13 on: September 13, 2017, 02:10:12 PM »
Instead of buying now or even when the current government is in charge, I would rather go for it once the government is gone and the bonds default. Since there are many HFs engaged as well as Goldman Sachs having their hand in there, I am sure the US will not be keen to make any further trades with the new government as long as their "old" debt is not paid. In that respect I have to admit that I do not understand GS to the fullest. The highest chance for profit basically occurs once the bonds default, which tells me they either believe in the govenment or they intend to buy more once the bonds defaulted to influence the new government.

Does anyone know where to find the bond terms?

I like MrB`s approach because I did not think of that so far, thank you for that.
« Last Edit: September 14, 2017, 06:37:25 AM by adventurer »